Consumer Internet Startups are Still Promising

By Matheus Riolfi

Consumer startups are still promising. New technologies are enabling them to pursuit business models that were not possible some years ago, such as customized e-commerce and peer-to-peer businesses. However, VC investment in consumer Internet is decreasing, which is a paradox.

It is true that venture capitalists are increasing investments in enterprise software companies, as Fred Wilson pointed during the LTV class. As an example, according to Boston Globe1, the amount of money invested in enterprise startups in Massachusetts increased 27% from 2011 to 2012, while the consumer startup had 16% less investments.  Matt Murphy, partner of Kleiner Perkins Caufield & Byers said in an interview on Bloomberg.com2, “We are really hitting on all cylinders on the enterprise front”2.  His company has plans to invest $200 million in enterprise startups in 2013.  Also, Fred Wilson wrote about this trend in his blog3.


Most of this movement is due to the excellent performance of some enterprise startups. At the same time, consumer players like Facebook and Zynga disappointed investors with poor post-IPO performance, which raises questions about the sustainability of this type of companies.

(Credit photo: Chris J Powell)
I will argue that there is still an immense potential for consumer companies that are able to leverage the rising volume of data from users to develop customized offers. Some companies already do that, such as Amazon, but I believe that e-commerce is still far way from being truly personalized. We have to improve a lot before the levels of customization shown on the movie Minority Report4, where advertising is individualized. We’ve made some progress in display advertising, especially with retargeting tools, but companies have not nailed consumer behavior yet. Startups can get there by developing solutions that integrate some off-the-shelf data analytic tools to understand customer behavior and offer customized solutions.


(Credit photo MyCreditSpecialist)


Another promising area for consumer startups is the sharing economy. I’ve read an interesting article this week on The Economist5 that talks about it. Technology is making peer-to-peer transactions easier and safer. The success of Airbnb is showing the way to companies in different sectors, such as RelayRides, that is a peer-to-peer rental car. Startups that apply the same concept to other sectors can create value to entrepreneurs, society, and investors. Of course there are limits to this expansion, but we are still at the beginning of this wave. Why not use the model to disrupt the travel agent/OTA model, for instance?

The tricky part is that those startups are becoming more dependent on investment to scale fast. Therefore, the importance of VCs and angels is increasing, at the time where the funds are becoming scarce. The good news is that the promising companies are still raising money. VCs are being more selective in first round investments and giving priority to follow on investments in starts among their portfolio companies. The bar is higher now.

Is this trend going to influence the next generation of startups?


[1] Boston Globe - http://b.globe.com/YpbDPY
[2] Bloomberg - http://bloom.bg/ZM9Cyz
[3] “What has changed”- Fred Wilson – http://www.avc.com/a_vc/2012/11/what-has-changed.html
[4] YouTube – Minority Report - http://www.youtube.com/watch?v=7bXJ_obaiYQ
[5] The Economist - http://econ.st/ZnPQaH



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